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Guide to overpaying your mortgage

Guide to overpaying your mortgage

Making overpayments on your mortgage could save you more money than you earn from your savings, depending on the interest rate on your mortgage. Read our guide on what you need to know...

Tobi Owens
From the Mortgages team
3
minute read
posted 30 DECEMBER 2019

When is it a good idea to overpay on my mortgage?

If you have money to spare, you could make overpayments on your mortgage rather than putting it into a savings account. Check with your provider first though, as you may have to pay some fee’s to do this. At the moment, the interest you can earn on your savings is at a relatively low rate, which means you could benefit from overpaying on your mortgage, reducing the overall interest you pay and shortening your mortgage term.

Mortgage deals with competitive interest rates tend to be available to those that have more equity in their property. Overpaying on your mortgage will increase the equity you have (portion of the property you own from paying off your mortgage), which can help you get a better deal if you decide to remortgage.

What do I need to consider before overpaying on my mortgage?

If the interest you earn on your savings account is higher than the interest you pay on your mortgage, it might be more beneficial to save. However, if your mortgage rate is higher, then paying off more of the debt might make more sense. The logic is that it is better to save paying £3 in interest than to earn £2 in interest.

However, there are still some things you need to consider before you overpay.

Many lenders have a limit on how much you can overpay by each month or in a 12-month period. Plus, you might have to pay an early repayment charge (ERC), which can also apply if you pay off your full mortgage early. You’ll need to ensure that the savings outweigh any penalties.

It’s important to prioritise your debts, so if you have any unsecured credit it will usually come with a higher rate of interest than a mortgage. If these debts are costing you more than your mortgage, it’s a good idea to pay these off first. 

Always check the terms and conditions of your mortgage and speak to your lender before you make overpayments. 

Should I still be putting money in a savings account?

If you decide to overpay on your mortgage, it can still be a good idea to keep back some savings to cover any unexpected ‘rainy day’ emergency costs, as you may not be able to request the money back from your mortgage once you’ve overpaid.

It’s also worth finding out if your interest on your mortgage is calculated monthly, quarterly or annually, to maximise the benefit of overpaying. If your interest is not due to be calculated for a few months to a year, you could put your money into a high interest savings account before using it to overpay on your mortgage.

Your mortgage provider will be able to tell you about any penalties for overpaying.

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